THE Slovak government declares as one of its goals reducing the tax burden on individuals. In 2002, personal tax rates were slightly decreased, and personal income progressive tax rates now range from 10-38%. However, the tax rate is only one of the factors determining the tax burden on individuals. When taking into account tax allowances, tax-deductible items and tax rates, the tax burden on individuals in Slovakia is still very high.
Slovak tax law is very restrictive and allows only a few types of individual income to be exempt from taxation:
* profit from the sale of a flat or house with a maximum 2 flats, providing the individual owns the flat/house for at least 2 years and has his/her permanent address there;
* profit from the sale of any other real estate owned for more that 5 years;
* profit from the sale of movable assets not including cars, airplanes and boats that have to be owned for at least one year;
* profit from the sale of shares owned for more than 3 years (even if this condition is not met, profit of up to Sk50,000 from the sale of Slovak shares listed on the stock exchange is still tax exempt).
Furthermore, Slovak tax law stipulates few allowable deductions such as mandatory social security, health and unemployment insurance contributions paid in Slovakia/abroad, or donations of up to 10% of an individual's taxable income to a Slovak corporate entity for charity purposes, providing further law conditions are met.
The tax position of foreign individuals is even worse, since few of them can decrease their taxable income with a child allowance of Sk16,800 per child or a spousal allowance of Sk12,000, because only people with a permanent address (trvalý pobyt) in Slovakia can use these deductions. Although these amounts are not large, this approach is unfair.
A foreigner with a long-term residence permit (green card) or a permanent residence permit should tax all his/her worldwide income in Slovakia unless a double tax treaty limits the scope of the foreigner's taxable income.
In general, people provide services as employees or as entrepreneurs in Slovakia. From the tax point of view, the position of employees is less favourable than that of entrepreneurs.
Slovak tax law stipulates only a few types of employment income and benefits that are tax-exempt. For example, the value of education connected to employment, meals and non-alcoholic drinks consumed on an employer's premises, or the use of an employer's recreational, health, education and sport facilities are tax-exempt.
Double tax treaties allow foreigners' employment income to be wholly exempt from Slovak taxation if the following conditions are met:
* the individual is present in Slovakia for less than 183 days in a calendar year/any 12-month period;
* the salary is paid by a foreign entity; and
* it is not borne by any Slovak entity.
Entrepreneurs tax only their profits. They can decide to apply their real business costs or deduction of
* 25% of taxable income; or
* 35% of consideration for the use or right to use any industrial or intellectual property including copyrights of a literary, artistic, scientific or other work; or
* 60% of taxable income from agricultural activities, providing Slovak tax law does not stipulate otherwise.
In addition, with effect from January 1, 2002, some entrepreneurs can tax their profits at a 25% tax rate providing they invest the difference between the progressive tax rate and the lower 25% tax rate and purchase depreciable assets within 3 years and record them as business assets for at least 3 years.
Slovak tax law sets an even more advantageous tax regime for a specific group of entrepreneurs with an annual income of up to Sk2 million, which is taxed at a rate from 2-2.75%. However, consultants, accountants, intermediaries, and people providing market research, advertising services or financial services are not allowed to use this method.
The tax liability of an entrepreneur with an annual income of Sk2 million that uses the tax rate of 2%-2.75% may be approximately Sk430,000 lower than that of an entrepreneur with the same income who applies the 25% flat deduction and uses the progressive tax rate. The tax burden of the entrepreneur in the latter case is almost nine times higher than that of the former.
There is no logic in treating one group of entrepreneurs more advantageously than another. The differences in tax treatment of entrepreneurs are so big that the fairness of Slovak tax law is very questionable.
Slovak law also forces Slovak employers to incur further costs in addition to a salary, such as social security, health and unemployment insurance contributions, meal or meal tickets, as well as the salary of an accountant responsible for calculating tax prepayments and taxes to be withheld from employees' salaries. This restricts them in using their financial sources effectively.
Ingrid Jalčová, ACCA, is a chartered accountant with five years of experience with global advisory firms. She invites comments and questions at email: email@example.com
Tax Corner is a bi-weekly column that will appear this summer. The next instalment will be on stands on June 30, Vol 8. No 25.